Homework answers / question archive / University of New Haven FINC 2213 Quiz 4 (Chap 3,5) True/False 1)The job of accountants is to create financial statements and the role of financial professionals is to interpret them

University of New Haven FINC 2213 Quiz 4 (Chap 3,5) True/False 1)The job of accountants is to create financial statements and the role of financial professionals is to interpret them

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University of New Haven

FINC 2213

Quiz 4 (Chap 3,5)

True/False

1)The job of accountants is to create financial statements and the role of financial professionals is to interpret them.

 

2.            EBITDA stands for earnings before interest taxes, debt and assets.

 

3.            The book value for a firm is equal to its market cap minus its market value added.

 

4.            If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.

 

5.            There is little information to be gained about management from examining the annual reports from prior years.

 

6.            Stockholder’s equity is the sum of paid-in-capital and retained earnings.

 

7.            Net income and cash flow for a firm are interchangeable, essentially the same thing.

 

 

Multiple Choice and Problems

 

8.            Which of the following is an INCORRECT sequence for the line items on an income statement?

a.            Sales, COGS, Depreciation, EBIT

b.            EBIT, Taxes, Interest, Net Income

c.             Revenue, Operating costs, Amortization, EBIT

d.            EBITDA, Depreciation, Interest, Taxes

9.            Which of the following statements about the annual report is INCORRECT?

 

a.            The 10-K financial documents filed with the SEC are included.

b.            A letter from the CFO to the shareholders is included that explains the financial reports.

c.             Detailed notes regarding the financial statements are included.

d.            The activities of the past year are reviewed.

e.            The plans for the coming year are outlined.

 

10.          Which of the following items is not a line item on a balance sheet?

a.            Taxes

b.            Notes payable

c.             Accruals

d.            Inventories

e.            Current assets

 

11.          Which of the following statements is INCORRECT?

a.            Since interest expenses are tax deductible, this line item will always appear above the line item for taxes in an income statement.

b.            A company is in good shape if its book value for its stock is greater than its market value.

c.             Amortization is really depreciation for intangible assets of a firm.

d.            Analysts are typically most interested in the top and bottom lines of the income statement.

e.            The income statement is much like a video in that it represents a summary of many data points.

12.          Which of the following statements is INCORRECT concerning the financial reports produced by corporations?

a.            The equity position for a firm at the beginning and end of the year is found in the statement of stockholder’s equity.

b.            The balance sheet lists the assets of a firm.

c.             Increases and decreases in a firm’s cash position are found in the statement of cash flows.

d.            Any one of the financial statements alone can give a total picture of where a firm stands from a financial perspective.

e.            Sales for a firm are found on the income statement.

13.          Which of the following statements about free cash flow is INCORRECT?

a.            Two years of balance sheet data are needed to compute the free cash flow for a firm.

b.            A negative value for the free cash flow is a desirable outcome.

c.             Free cash flow includes the sum of NOPAT (net operating profit after taxes), depreciation and amortization as one component.

d.            The statement of cash flows is necessary to compute the free cash flow for a firm because it provides information on Capex expenditures.

 

e.            Expenses deducted for free cash flow are Capex and the change in NOWC.

14.          Which of the following statements is INCORRECT?

a.            The statement of cash flows has 4 general categories.

b.            To assess the true financial picture of a company, all of the financial statements need to be considered together.

c.             Because of differences in the amount of debt used by various companies, analysts use EBITDA to compare their financials on a cash basis.

d.            Earnings per share is calculated as cash flow divided by common shares outstanding.

e.            It is important for companies to be generating cash from their operating activities instead of from any investments they might make with their surplus cash.

15.          Which of the following statements in INCORRECT?

a.            Paid in capital represents the money raised by firms from IPO’s and SPO’s.

b.            Notes payable are usually counted as a current liability since their duration is less than a year.

c.             Retained earnings represents accumulated net income kept by the firm over the years of its existence.

d.            The balance sheet is equivalent to a snapshot of the assets and liabilities for a firm.

e.            Net fixed assets are counted as a liability of the firm on the balance sheet.

 

 

16.          Which of the following statements is INCORRECT?

a.            The tax liability for capital gains is dependent upon how long the investment is held.

b.            Capital losses for a firm can offset its tax liabilities.

c.             For two companies with the same revenue and expenses, the one with debt will have more net income than the one with no debt.

d.            A technology firm that releases version 3 of its software will likely have to write off the value of version 2 in inventory because few customers will want to buy this older version.

e.            Earnings per share is calculated by dividing the amount of net income remaining after paying any dividends by the number of shares outstanding.

17.          Which of the following statements is CORRECT?

a.            SIC codes were developed by bureaucrats and are numeric with 6 digits.

b.            NAICS codes were developed by the U.S., Mexico and Canada for the financial industry.

c.             GICS codes were co-developed by Standard and Poors and use 8 digits to describe 10 sectors.

d.            The XLF SPDR ETF has been split into two components, one is financial services and the other is real estate.

e.            The XLP ETF is the consumer staples sector which includes such companies as Proctor and Gamble, Coca Cola and Johnson and Johnson.

 

18.          Prezas Company's balance sheet showed total current assets of $4,250, all of which were required in operations. Its current liabilities consisted of $975 of accounts payable, $600 of 6% short-term notes payable to the bank, and $350 of accrued wages and taxes. What was its net operating working capital?

 

 

 

 

 

 

 

19.          Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $25.70 per share. By how much do the firm's market and book values per share differ?

 

 

 

20.          Rao Construction recently reported $20.50 million of sales, $12.60 million of operating costs other than depreciation, and $4.00 million of depreciation. It had $9.50 million of bonds outstanding that carry a 7.1% interest rate, and its federal-plus-state income tax rate was 40%. What was Rao's operating income, or EBIT, in millions?

 

 

 

 

21.          Vasudevan Inc. recently reported operating income of $2.75 million, depreciation of $1.20 million, and had a tax rate of 30%. The firm's expenditures on fixed assets and net operating working capital totaled $0.605 million. How much was its free cash flow, in millions?

 

 

 

22.          Over the years, O'Brien Corporation's stockholders have provided $20,000,000 of capital, when they purchased new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 1,000,000 shares of common stock outstanding, and it sells at a price of $38.50 per share. How much value has O'Brien's management added to stockholder wealth over the years, i.e., what is O'Brien's MVA?

 

 

 

23.          You want to buy a condo 5 years from now, and you plan to save $2,500 per year, beginning immediately. You will make 5 deposits in an account that pays 6.5% interest. Under these assumptions, how much will you have 5 years from today?

 

 

24.          Your father has $600,000 invested at 7.75%, and he now wants to retire. He wants to withdraw $50,000 at the end of each year, beginning at the end of this year. How many years will it take to exhaust his funds, i.e., run the account down to zero?

 

 

25.          You just won the state lottery. The state gives you the choice of $2,000,000 today or a 20-year annuity that earns 4.22% interest for 20 years with the first payment coming one year from today. What payment amount would you receive each year for the annuity option?